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A manufacturer of defence and aerospace electronics solutions, Data Patterns caters to the entire spectrum of defence and aerospace platforms - space, air, land and sea. Designed, developed and manufactured in-house, its products and sub-systems cater to the entire manufacturing value chain, right from industrial and test automation to space systems to defence and aerospace systems through DRDO (Defence Research and Defence Organisation). Its major product categories include radars, electronic warfare, communication systems, RF (radio frequencies) and microwave, military COTS (commercial off-the-shelf), avionics, missile and torpedo electronics, fire and launch control systems, space-based systems and automatic test equipment.
The company derives its revenues from production contracts (76 per cent of FY21 revenue), development contracts (16.3 per cent) and service contracts (7.7 per cent). Since the company undertook a pre-IPO placement of Rs 60 crore (at Rs 577 per share), the size of the fresh issue has been reduced from Rs 300 crore to Rs 240 crore.
As per a Frost & Sullivan report, the Indian defence-electronics market is evaluated to be worth around $1.88 billion in 2021 and is expected to grow to approximately $6.99 billion in 2030, at a CAGR of 15.7 per cent. The government's focus on defence modernisation, coupled with initiatives like Aatmanirbhar Bharat, the Defence Acquisition Procedure and the upcoming Defence Production and Export Policy, acts as a growth catalyst.
Strengths
A strong order book: The company's order book grew from Rs 80.5 crore in March 2017 to Rs 581.3 crore in September 2021 at a rate of 55 per cent CAGR. Based on FY21 revenue of Rs 224 crore, this translated into revenue visibility of about 2.5 years. In FY17, all development and production contracts contributed 74.4 per cent and 15.4 per cent, respectively, to the order book. However, as of September 2021, production contracts accounted for 67.1 per cent of the order book, reflecting an increase in the number of products that progressed from the development to production phase, which paved the way for an increase in its turnover and profits.
Pre-approved components: Data Patterns started its journey by manufacturing the building blocks (or components) of technologically complex products for the DRDO and DPSUs (Defence Public Sector Undertakings). Leveraging this experience, the company has been able to build its products. Further, its 'reusable building block' model results in the company gaining competence across various product domains and achieving better margins, as it could save on product development costs and time.
A favourable regulatory environment: The Defence Acquisition Procedure (DAP) 2020, announced by the Ministry of Defence, focuses on boosting indigenous production of defence equipment and products significantly, thereby turning India into a global manufacturing hub of weapons and military platforms. This initiative, coupled with the company's capabilities, enables the company to scale up its existing products or building blocks to end systems or complete solutions rapidly.
Risks/weaknesses
Customer concentration: In FY19 and FY20, the top five customers accounted for 69.1 per cent and 85.7 per cent, respectively, of the total revenue. In H1 FY22, the largest customer accounted for 61.6 per cent of the total revenue. Any adverse development with customers, such as disputes with or disqualification by such customers, will have a material impact. Additionally, if these customers are able to fulfil their requirements through Data Patterns' competitors, it would then lead to a significant loss of business.
Huge working-capital requirements: Owing to long product-development periods and production cycles, the company's operations require significant working capital. Over FY19-21, its net working capital as a percentage of revenue averaged 103.2 per cent.
Dependence on government spending: Its contracts are dependent on the budget extended by the Ministry of Defence and the Department of Space. While there has been an increase in the total defence and space allocations by the government over a period of time, changes in the government's defence or space-related policies may have an adverse impact on the business.
Also, read about Data Patterns IPO: How good is it? to learn how we evaluate the company on various metrics.
Disclaimer: The authors may be an applicant in this Initial Public Offering
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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